Please ensure Javascript is enabled for purposes of website accessibility

DraftKings Faces Big Fight Against Las Vegas Casino Giants

By Travis Hoium - Jan 20, 2021 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

DraftKings has become a market favorite, but it may have a long road to profitability.

In the last few months, casino giants have made clear that they aren't going to let online betting-focused companies like DraftKings (DKNG 0.00%), Golden Nugget Online Gaming (GNOG), and Rush Street Interactive (RSI -1.51%) take the market without a fight. 

Caesars Entertainment (CZR), MGM Resorts (MGM -7.54%), and Wynn Resorts (WYNN -5.39%) are putting billions of dollars into acquiring and building their own online gambling platforms. And they may have some advantages that digital-only companies don't in this fight for the next generation of gambling

Craps game on a smartphone on a gambling table.

Image source: Getty Images.

Online gambling stocks are hot

You can see below that stocks related to online gambling are extremely hot right now. Even the rise in Penn National's (PENN -2.33%) stock has been driven by the hope that online gambling will be a big business, with the help of its partnership with Barstool Sports. 

DKNG Chart

DKNG data by YCharts

DraftKings is by far the biggest of these companies with a market cap of $21 billion. But traditional casino companies aren't going to give up the market without a fight. 

The excitement over online gambling is driven primarily by the numbers coming out of New Jersey's online sportsbooks. In 2020, betters placed a record $6 billion worth of sportsbook bets (bets placed, not casino revenue), 93.3% of which were made online. If that eventually translates to the entire U.S. and you bring in casino bets, this could be a multi-billion dollar industry annually. 

How Las Vegas is fighting back

The growth of the online gambling business hasn't been lost on traditional Las Vegas giants. And they're investing in building their own gambling platforms and developing partnerships they hope will put them a step ahead. 

Caesars Entertainment announced a 2.9 billion GBP deal to acquire its online gambling partner William Hill. MGM Resorts has reportedly been interesting in acquiring partner Entain (ENT -2.12%), which owns half of BetMGM and could pay $10 billion or more in a buyout. And Wynn Resorts recently announced a restructuring of Wynn Interactive, which will bring gaming to as many as 16 states in the near future. Wynn owns 71% of that venture.

These companies are bringing their big names and balance sheets to the world of online gambling. And they're hoping well-known partnerships will help attract customers. Wynn has a deal with Nascar, and MGM has deals with the NBA, MLB, NHL, MLS, WNBA, and many more sports organizations, including individual teams. Caesars' biggest agreement is with ESPN. 

Why are these partnerships important? They give casino giants viability with consumers and a way to reach customers with advertisements. And customer acquisition is the name of the game for online betting right now. 

The big cash drain

It's hard to overstate how unprofitable the online gambling business is today and just how expensive it is to acquire customers. In the first nine months of 2020, DraftKings lost $575 million from operations on $292.3 million of revenue. Sales and marketing costs alone are 104% of revenue, and general and administrative costs of $274.2 million show just how much overhead costs.

The biggest problem right now is that customer acquisition costs far exceed revenue. That might be temporary as DraftKings casts a wider net with advertising than it can address with legal gambling markets. But this is definitely a negative-cash-flow business today, and looks to be so for the foreseeable future. 

However, incumbents Caesars, MGM, and Wynn have casino businesses that generate cash on an ongoing basis, so they can put some of that money into building online gambling presences. In other words, they can withstand investing in the acquisition of online gambling customers as a path to long-term growth. DraftKings, and its online-only counterparts, don't have that same flexibility without raising cash. 

Who will win the online gambling market?

If we knew that legal online gambling markets would increase from just over a dozen states today to the entire U.S. in a few years, it may be worth buying online-only gambling companies, because they will be better growth stocks long-term.

But there's a lot of uncertainty around when states will legalize more online bets, and that could give incumbents a time advantage -- they can withstand the cash burn online gambling will take for years. That's why I think an established player like MGM will ultimately be a better bet than a company like DraftKings. 

At the very least, we know Las Vegas casino giants are not giving up online gambling without a fight, and that could make it hard for DraftKings and others to live up to lofty investor expectations. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

DraftKings Inc. Stock Quote
DraftKings Inc.
DKNG
$13.86 (0.00%) $0.00
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$62.82 (-5.39%) $-3.58
MGM Resorts International Stock Quote
MGM Resorts International
MGM
$33.00 (-7.54%) $-2.69
Penn National Gaming, Inc. Stock Quote
Penn National Gaming, Inc.
PENN
$30.20 (-2.33%) $0.72
Caesars Entertainment Corporation Stock Quote
Caesars Entertainment Corporation
CZR
Entain Stock Quote
Entain
ENT
$1,362.50 (-2.12%) $-29.50
Rush Street Interactive, Inc. Stock Quote
Rush Street Interactive, Inc.
RSI
$5.86 (-1.51%) $0.09
Golden Nugget Online Gaming, Inc. Stock Quote
Golden Nugget Online Gaming, Inc.
GNOG

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
328%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.